Taking Stock / The Cycle Is High, the Time Is Nigh

The high-tech sector needs a big kick to make it worthy of its 'start-up nation' tag

A famous study on Wall Street several years ago found a negative correlation between future stock market trends and dramatic headlines in leading magazines. Time declared in the early 1980s that it was the end of the era of stocks. Shortly afterward, stocks began the biggest, strongest and weightiest upturn in history. It lasted 20 years and defined Wall Street as we know it, even after two financial crises.

That's how it is with the popular press. When something is big enough, talked-about enough, legitimate enough, interesting enough to make the cover story - well, then it's apparently time to sell.

Israeli high-tech has been rocketing forward since the start of the 1990s, but only in the last year did it win sharp focus, with the publication of the book "Start-Up Nation" by Dan Senor and Saul Singer. The success of their book - which business and political leaders the world over call "inspiring" - justifiably arouses pride. The thing is, we can only hope it doesn't go down in history as the peak of the Israeli high-tech era, to be followed by protracted stagnation.

The suspicion we and others have been harboring for several years received empirical, academic verification last week, when the Samuel Neaman Institute for National Policy Research at the Technion in Haifa published a comprehensive report on the state of Israeli high-tech. It turns out that, for a decade, the industry has been standing still regarding its contribution to the Israeli domestic product and the number of employees - about 260,000.

Before we continue, we must stress that the Israeli high-tech industry is the most important, the biggest and inspiring thing the Israeli economy has known in 30 years. Its success stands strong against all the ills that have spread during the last 20 years.

But its function as a growth driver, as a catalyst, as an agent of change - it hasn't been fulfilling that any more. It is not increasing GDP per capita. It is not increasing its share of the labor market and it hasn't broken beyond its boundaries in a decade.

Israeli high-tech can be divided into three parts: Giant multinationals with large R&D centers in Israel, such as Intel and HP; big Israeli companies, like Check Point Software Technologies and NICE Systems; and the Start-Up Nation, smaller companies with sales of up to $50 million a year.

The Israeli R&D centers of multinational companies continue to flourish. But nothing there can be taken for granted. The Israelis leading them know there is a sword hanging over their heads: Any day, a chunk of their activities could be transferred to India, China or even Europe. In the last year few major R&D centers have opened, especially not at the pace we saw in the late 1990s and early 2000s.

The Start-Up Nation continues to drum up transactions: Fluctuations from year to year are big, but the volumes are a given. Each year $1 billion to $3 billion-worth of startups are sold, but no more: The pace of exits has been range-bound for a decade now.

The high-tech engine stutters

The bigger disappointment is the big companies. We peaked in 2000 and after a slow decline in subsequent years have recently rose back up - but we cannot speak of breakthrough. There is no clear trend of improvement.

The disappointment is keen: High-tech had been expected to drive the rest of the economy to a better place - traditional industry, services, marketing, the entire labor market. The expectation had been that the competitiveness, dynamism, creativity, and daring of the high-tech stars would seep through to the rest of the business sector.

Has it? Has there been a leap forward by retail, commerce, insurance, banking, construction and communication in the last decade? Or are we stuck more or less where we were a decade ago?

We would be glad to hear your opinion. We have difficulty seeing progress.

The structure of the Israeli economy - concentrated, monopolistic, cartelistic, the destructive interrelations between finance and non-finance businesses, and the disease of unholy ties between government and wealth - must bear much of the blame for the stagnation and deterioration of whole areas.

In the 1990s, Israeli high-tech had strong growth engines, such as the technologies and military know-how, the immigration from Russia and fruits of the schooling system in the 1960s and 1970s. Add to that globalization, the peace process, the arrival of foreign investors and the establishment of a venture capital scene.

But these have played out their role. The process of exposure, the entry of foreign money and the structural reforms have come to a halt. There are no jet-thrusters, no powerful market forces to push us to the next level, yet we face terrific threats, first and foremost the deterioration of the education system.

The result is two-pronged. The competitiveness, innovation and creativity of high-tech have not filtered through. They do not affect the rest of the economy, which continues to suffer from poor productivity. High-tech itself can no longer drive forward the economy and GDP per capita.

Haim Shani, the director general of the Finance Ministry and a former executive in high-tech, understands the state of high-tech all too well, and has spent the last year learning about the state of the rest of the economy. He is spearheading a number of moves to create a new ecosystem for the high-tech world and Israeli exports: Strengthening education and academia, forging ties between academia and business.

These are important, complex moves that, if done wisely, will bear fruit down the line, many years ahead. But they aren't enough. The Israeli economy needs a series of sharp structural changes, courageous and rapid, to forge market structures that will in turn significantly increase productivity, innovation and creativity.

We don't need more start-ups

To borrow a phrase from Senor and Singer, Israel needs to become a start-up nation in non-high-tech areas, too. It needs to develop the competitive, entrepreneurial drive to build new companies and ventures, innovative services and new people. In high-tech we need less start-ups and more mature companies, more managers, managements and workers, a corporate culture that thinks in the long-term.

The business sector can't do it alone. It needs the government to create the market structures and environment to foster revolution. Now that we are at the height of a cycle and tax revenue is rising, this is the time to act.